Criteria for the use of common ratings

7.1 This section deals with situations in which a firm, for reasons of cost and/or practicability, does not apply its usual IRB rating system to certain exposures but nevertheless wishes to treat them as being on an IRB approach, as opposed to leaving them on standardised (using the partial use provisions, where available). In such cases, a firm typically gives a common rating to all such obligors which it argues is more conservative than individual ratings.

7.2 Such an approach cannot in itself be BIPRU compliant as it does not meet one of the overriding requirements for the IRB approach - to provide a meaningful differentiation of obligor risk (BIPRU 4.2.2(1)R). However, the provisions of BIPRU 4.1.25R and 4.1.27G mean that perfect compliance is not essential provided all the incidences of non-compliance, when taken together, are immaterial.

7.3 In accordance with the BIPRU provisions on immateriality, firms should use common ratings only as outlined above under the following conditions:

a. the firm is able to justify this approach within the context of BIPRU 4.1.27G;

b. the firm is able to demonstrate why a slimmed-down rating system is not a practicable alternative for some or all of the exposures in question;

c. the firm’s policy for excluding such exposures from its usual ratings systems is clear and transparent - both internally and externally, as relevant;